Clawbacks and cash offers in NZ

Competitive banks offering large cash incentives to attract new customers are potentially leaving New Zealand mortgage brokers out of pocket.

The growing trend among banks has produced a “churn” of business which is non-advisor friendly creating less loyal clients for both banks and advisors.

Following lending restrictions brought into New Zealand by the Reserve Bank and as interest rates rise take hold, banks are offering more and more cash incentives to clients to refinance or place their mortgage with them, creating an auction for clients and their mortgages between banks.

In this low-loyalty environment, which began about five years ago and increase in intensity as lending restrictions take effect, has some clients even move to a new lenders within the mortgage broker’s clawback period of up to 18 months hence leaving the broker with no, or a reduced commission at no fault of the advisor.

A lot of extra work and potentially reduce income for the advisor, but the client has no requirement to pay back the large cash incentives.

The banks are not necessarily rewarding the right people but made mortgages into a commodity and created a disloyal environment.

Clients now expect to receive a number of offers from different lenders meanings advisors need to farm the deals to meet client’s expectations, or the clients will shop the market themselves. This then creates poor draw down rates and a lot of addition costs on lenders and advisors.

Is the system broken?

In many cases, the amount of money the bank pays to attract a single client is greater than the commission paid to mortgage advisor – advisor is paid a commission of 0.4 per cent to 0.65 per cent of the loan.

Customers are becoming more price-driven, and expect to be paid by the bank to transfer or place their mortgage to them: Up to or in excess of $2,500. Fot example, with a $200,000 mortgage, the advisor receives average up to $1,300.00 while clients are paid up to $2,500. If refinance or repaid within 18 months, claw backs apply to advisor while client has no requirement to repay the $2,500.

As an example Westpac paid one of my client’s $1500 cash for a $50,000 mortgage and reduce the interest rate by 0.5 per cent per annum for a loan that’s only going to be in place for 3 years.

This was offered without any request from client or myself. In this case, the bank would not make any profit from the three-year mortgage and I questions how sustainable this can be to banks long term future, profits, staff and advisor relationships etc.

So far there seems to be little danger of the banks losing money, with New Zealand banks posting further record profits just last week. ANZ, for instance, recorded an $800 million profit. As other smaller banks like SBS Bank join the incentives trend, the consumer is so more informed about their entitlements through internet and other forms of media that smaller lenders or non-banks like Resimac Home Loans, who are loyal to advisors, find it hard to match the incentives of the large lenders and compete.

Is it time to relook at creating loyalty and banks need to work with advisors on ways to reinstate loyalty and stop ‘churn’ and ‘farming’ between lenders. Do banks need to reward the advisors for the support, advice and trust they provide to clients to help build client retention. Banks need to think who they are rewarding and reasons why.

Is it time reintroduce trails for good advisors and better support the advisor to retain the client “as opposed to benefiting clients who have no loyalty” because of the environment the banks have created.